Analysis Interpretation of the news based on evidence, including data, as well as anticipating how events might unfold based on past events

Johnson & Johnson Merits Its High Valuation -- For Now: Gadfly

Johnson & Johnson logos are displayed for a photograph in Tiskilwa, Illinois, U.S., on Monday, April 11, 2011. Johnson & Johnson, the world’s second-biggest seller of medical products, will pay $70 million after admitting that the company bribed doctors in Europe and paid kickbacks in Iraq to win contracts and sell drugs and artificial joints. (Bloomberg via Getty Images/Bloomberg)

ByMax Nisen | Bloomberg

April 17, 2018

Johnson & Johnson is in rarefied air.

The world’s largest health-care company (at $348 billion in market value, topping Pfizer by more than $130 billion) on Tuesday reported quarterly earnings and revenue that beat analyst estimates -- which has become a routine -- and raised its sales forecast for the year. But for all of its strengths, the company’s hefty valuation leaves it little room for error.

J&J’s sales grew 12.6 percent in the quarter from a year earlier -- impressive for such a big company. But much of that was attributable to foreign-exchange trends; operating growth was sluggish outside of J&J’s pharma unit. And the biggest revenue boost came from tacking on Actelion Ltd. sales; JNJ’s $30 billion acquisition of the Swiss company closed in the middle of 2017.

Though it’s still early days for the Actelion deal, it is arguably under-performing so far. Its newer drugs for pulmonary arterial hypertension -- its key franchise -- can’t seem to make up for falling sales of Tracleer, an older medicine facing generic competition in Europe. This may eventually weigh on JNJ’s growth.

Disappointing Actelion results leave JNJ even more dependent on the rest of its pharma unit. Fortunately, the news there has been good: Even excluding currency impact and Actelion, the division is outgrowing most of its large rivals.

But J&J faces the same balancing act between new and old medicines every large pharma company does, with the added burden of making up for consumer and device units that have struggled to consistently grow sales. J&J does have an enviable track record of blockbusters and commercial success, and its blood cancer drugs Darzalex and Imbruvica delivered particularly strong sales growth in the first quarter. But sales of its largest drug Remicade fell 17 percent as cheaper biosimilar rivals forced price cuts. And that drug’s decline could accelerate.

J&J doesn’t expect generic competition this year for prostate-cancer drug Zytiga, its third-best-selling medicine in the quarter and one of its fastest-growing products. But J&J could be wrong about that. It has follow-up medicines that could replace some Remicade and Zytiga sales -- Tremfya and Erleada, respectively -- but reaching the sales heights of their predecessors will be tough.

J&J trades at 15.8 times blended forward 12-month earnings estimates, down a good bit from 18.7 in January. But it’s still more highly valued than big pharma rivals such as Pfizer and Novartis. Its guidance on Tuesday suggests it’s confident its pharma unit won’t slow down. But the higher it flies, the bigger the risk of a comedown.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.